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Q:

Subject: One question on out-of-state business

 

Hi,

TaxGuru.org has wealth of information.  However, I could not find information on one of my question.  Can you please provide an answer to this following question?

I am Single-Member LLC incorporated in Florida and have the approval of IRS for treating as S-Corporation. Income for my S-Corporation for this year 2005 is fully sourced from Pennsylvania. For Pennsylvania, basically, my business is out-of-state S-Corporation.  My S-Corp gets 1099 from a company in PA.

Assuming that S-Corporation receives 1099 income of $150,000 from PA and me as an employee of S-Corporation receiving a salary of $100,000, I would like to know the tax implications. Let us also assume another 10,000 towards qualified business expenses.

Am I supposed to pay Pennsylvania state tax for my W2 income of $100,000 and business income of 40,000? Can we treat $100,000 salary as Florida Income because it is paid by LLC/S-Corp in Florida and I am also resident of Florida?  In this case, I need to pay PA State tax only on $40,000 income.

Thanks,

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate an LLC or S corp without a professional tax advisor, you are asking for big trouble.  This is even more critical when operating in more than one state because the rules for reporting and taxation by each state are different.

Just from the sketchy details you provided, it is apparent that you will have to file an S corp return in PA, as well as a nonresident individual return to report and pay tax on the S corp income passed through to you on the K-1.  How much, if any, of the $100,000 W-2 income is taxable to PA will most likely depend on how much time you spent working inside PA.  There will also be the issue of PA payroll taxes if it is determined that any of your W-2 pay was earned there.

A good tax pro should be able to help you stay in proper compliance with the PA tax authorities.

Good luck.

Kerry Kerstetter

 
Follow-Up:

Kerry,

 

Thank you very much for your response.  I do have a CPA, but he is not familiar with PA taxes.  Looks like I have to check up with some one in PA who are familiar with PA Taxes.

Your input is vary valuable and thanks again for replying me.

Regards,

 
My Reply:

Nobody knows everything about all of the states’ tax laws.  However, a good tax advisor will know how to research the rules for any one particular state so that you don’t have to hire a different tax pro for each one.  The fundamental concept of income-sourcing is fairly consistent in most states; so that only the finer details usually need to be determined for a particular state.

The best place to start is from the SisterStates.com website to take you and your professional advisor to the state’s official website.  QuickFinders and Tax Materials, Inc. both have very fine reference books covering the various states’ tax issues.  These are what I use when one of my clients either moves to a new state or becomes in other ways required to file tax returns with a new state.

Good luck.

Kerry Kerstetter